Understanding Professional Liability Insurance for General Contractors and Trade Contractors

In the home service and construction industry, General Contractors (GCs) and Trade Contractors (TCs) often overlook the significance of professional liability insurance. This oversight can lead to substantial financial losses, as evidenced by the staggering $80 million in professional liability losses experienced in the past year alone report by one insurance company. Understanding the nuances of professional liability coverage is crucial for protecting your business from potential economic damages. This blog will delve into the complexities of professional liability insurance, common misconceptions, and real-world claim examples to illustrate the importance of adequate coverage.

Misconceptions About Professional Liability Insurance

Many GCs and TCs believe they do not have a true professional liability exposure. This misconception stems from a lack of understanding of what constitutes a professional liability claim. While GCs and TCs may not be directly involved in design activities, their professional liability exposure can arise from various areas, including:

Pre-constructability reviews
Constructability reviews
Unqualified subcontractor selection
Material selection
Value engineering
Scheduling and sequencing of construction or subcontractors
Use/manipulation/management of Building Information Modeling (BIM) systems
Vicarious liability for subcontractors/trade consultants with design responsibility

It is essential to recognize that professional liability claims generally arise from economic losses, which can include cost overruns, owner's consequential damages, loss of use or income, diminution in value, and business interruption. These claims are not covered by standard General Liability (GL) policies, which typically only cover bodily injury (BI) and property damage (PD) via endorsements like CG2279 or CG2280.

Understanding Coverage Variations Among Carriers

The professional liability insurance market is complex, with each carrier offering different coverage forms and appetites. The combined Contractor's Professional Liability (CPL)/Professional products are among the fastest-growing in the market, but each carrier defines their coverage differently. For instance:

Definition of Professional Services: Some carriers tie the definition of professional services to contracting operations, while others use a standalone definition or link it to the services indicated on the application.
Rectification, Mitigation, and Protective Provisions: These terms are defined differently across markets, affecting coverage scope.
Faulty Workmanship Coverage: Some carriers offer coverage for faulty workmanship, sometimes as a true rip/tear coverage, which can significantly impact claims handling and coverage limits.

Given these variations, it is crucial for contractors to work with knowledgeable insurance professionals who can help navigate these complexities and secure the appropriate coverage.

Real-World Claim Examples

To highlight the importance of professional liability insurance, let's explore some real-world claim examples:

$10M Loss on a Plumbing Contractor for Professional Liability A plumbing contractor working on a large hotel development project in Texas faced allegations of inadequate water pressure on the upper floors of the building. The claim stemmed from the hiring of unqualified subcontracted plumbers, leading to economic loss due to a delayed opening. This case underscores the importance of vetting subcontractors and understanding the potential professional liability exposure in such scenarios.
$5M Loss on an HVAC Contractor for Professional Liability An HVAC contractor involved in a data center project was held liable for mold build-up in the ductwork. The claim arose from the material selection process documented in constructability review meetings. This example highlights the critical role of material selection and the potential liability associated with decisions made during project planning and execution.
$1M Loss on an HVAC Contractor for Professional Liability An HVAC contractor suggested a cost-saving measure by replacing eight 10-ton HVAC units with four units supplying the same tonnage. This decision led to inadequate HVAC for the structure, resulting in a lawsuit from the owner/developer. This case illustrates the risks associated with field changes to design and the importance of adhering to engineering specifications.

Solutions Offered by Rikor

At Rikor, we understand the unique risks faced by GCs and TCs in the home service and construction industry. Our comprehensive professional liability insurance solutions are designed to address these risks and provide robust coverage. We offer:

Tailored Coverage Forms: We work with a variety of carriers to provide coverage that aligns with your specific needs, whether it involves contracting operations, standalone professional definitions, or services indicated on your application.
Rectification, Mitigation, and Protective Provisions: Our policies include clearly defined provisions to ensure you have the coverage you need in case of a claim.
Faulty Workmanship Coverage: We offer true rip/tear coverage for certain classes, providing peace of mind in the event of faulty workmanship claims.
Risk Management Support: We provide ongoing risk management support to help you mitigate potential professional liability exposures through best practices in subcontractor selection, material selection, and project planning.

Navigating the Professional Liability Insurance Landscape

Given the complexities and variations in professional liability insurance, it is essential for GCs and TCs to take a proactive approach in securing the right coverage. Here are some key steps to navigate the professional liability insurance landscape effectively:

Conduct a Risk Assessment: Evaluate your business operations to identify potential professional liability exposures. Consider areas such as pre-constructability reviews, subcontractor selection, and material selection.
Work with Knowledgeable Professionals: Partner with insurance professionals who specialize in the home service and construction industry. They can help you navigate the nuances of professional liability coverage and secure the appropriate policies.
Understand Policy Terms and Conditions: Thoroughly review policy terms and conditions to understand what is covered and what is excluded. Pay close attention to definitions of professional services, rectification provisions, and faulty workmanship coverage.
Implement Risk Management Practices: Adopt best practices in project planning and execution to mitigate potential professional liability exposures. This includes vetting subcontractors, adhering to engineering specifications, and maintaining thorough documentation of decision-making processes.

Conclusion

Professional liability insurance is a critical component of risk management for GCs and TCs in the home service and construction industry. By understanding the nuances of coverage, addressing common misconceptions, and implementing robust risk management practices, you can protect your business from substantial financial losses. At Rikor, we are committed to providing tailored professional liability insurance solutions and ongoing support to help you navigate this complex landscape and safeguard your business.